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U.S. Government Rating Downgrade Possible Due to Debt Ceiling, Says Moody's
June 3, 2011
FEI Summary
Moody’s Investors Service announced on June 2, 2011 that if Republicans and Democrats cannot find a compromise in order to raise the debt limit in the near future, then the United States government’s rating will be under review for a possible downgrade from its current AAA rating. Moody’s cited the “degree of entrenchment into conflicting positions” in Congress and the lack of progress on debt-reduction negotiations as the reason for this review.
There was a vote in the House of Representatives on Tues., May 31, on H.R. 1954, which is more commonly known as the bill for a “clean” debt limit increase. The bill was largely opposed and resulted in a vote of 97-318. Many Republicans made clear that they were not willing to raise the debt limit unless significant spending cuts are made and if tax increases are off the table. Many Democrats have opposed deep cuts to programs like Medicare, and say new revenue must be part of the final solution.
The “Gang of Six” was one of the best hopes for a bipartisan compromise, due to its members coming together voluntarily to hash out a long-term debt reduction plan. The group, however, faced a setback when Sen. Tom Coburn (R-Okla.) announced he was taking a break from negotiations due to a failure to compromise. Another bipartisan group led by Vice President Joe Biden and commissioned by President Barack Obama, whose purpose is to reach a plan in time to increase the debt ceiling, has also been criticized for not moving swiftly enough toward a solution. Little has been heard from this group so far, but it is scheduled to resume negotiations on June 9.
Still, there is a sense of understanding from leadership in both parties that the situation must be remedied soon. Speaker of the House John Boehner (R-Ohio) has spoken briefly with President Obama, and reportedly agree that both parties will be worse off if no agreement is met. Boehner said he is willing to open direct negotiations with President Obama and other Republican leaders to resolve this issue in a timely manner.
The U.S. Treasury estimates that there will be a default in August if the debt ceiling has not been increased. Treasury Secretary Timothy Geithner has given Congress a specific deadline of Aug. 2, at which point the government will be out of money. Moody’s stated that if there is no apparent progress in budget negotiations by the middle of July, then the chances of the U.S. government’s rating dropping will significantly increase.
However, if a default is avoided, the government would maintain its AAA rating. The rating will remain stable as long as negotiations are successful in producing a credible plan for long-term deficit reduction that declines the government’s debt ratios, especially the ratio of debt to GDP.
To read more about Moody’s statement, click here.
Prepared June 2, 2011, by Jonathan Ward, (jward@financialexecutives.org), legislative aide, Government Affairs, for Financial Executives International; and Christina Crooks (ccrooks@financialexecutives.org), manager, Government Affairs-Financial Policy, Financial Executives International (FEI). This summary does not represent FEI opinion specifically noted above.
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